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An open letter to Tony Abbott

Dear Prime Minister,

Individual Australian investors deserve to receive conflict-free advice from financial advisors, and to be protected from overt or subliminal incentives that might lead those advisors to provide advice that is anything less than completely client-focussed.

There are too many stories of clients being erroneously pushed into products that are unsuitable for them – and an unconscionably high proportion of those products carried enormous commissions for the planner or the planner’s dealer group.

Indeed, the correlation is so high as to void any claim that the actions of those planners were simply honest mistakes of judgement bearing no influence from those incentives.

The vast majority of financial planners are conscientious, hard-working, honest professionals, who try to do the best for their clients. It is in the interest of these people that they are not influenced by potential commission payments to them or their employers and dealers – whether knowingly or due to the choices those dealer groups make.

A (hopefully very small) minority of financial planners are undoubtedly less conscientious, and happy to see their advice tainted by what they can get from it.

The former group deserve the protection and support of conflict-free financial advice. The latter group deserve to be run out of town.

The Australian Financial Review today carries an article suggesting some in the financial services industry are lobbying your new federal government very hard to roll-back reforms made under the previous government. Apparently such rollbacks would “protect billions in commissions”.

I’m sure that’s right – those “billions in commissions” are 10-figure amounts that are sloshing around the financial system specifically to influence financial planners.

Some argue that these commissions don’t influence planners. If that’s the case, there are some very, very smart men and women currently wasting billions of dollars on commissions that they needn’t pay – because under that scenario, the commissions aren’t impactful. I don’t think these people are silly enough to waste those billions unless they’re getting something for them.

Mr Abbott, I understand why some in the industry are lobbying you and Senator Sinodinos for changes. They like the current system with its gravy trains of fees and commissions.

In the end, though, these fees simply rob individual investors of returns they could otherwise be making (because the commissions reduce investment returns from those products by increasing their cost) and expose investors to potentially conflicted advice.

I expect my doctor to prescribe medication, my accountant to prepare tax advice and our police to enforce the law, each in the interest of their clients and communities, and without fear or favour. I expect my financial planner to offer the same implicit and explicit guarantee – and to be free of inducements, no matter how subliminal.

The industry apparently wants to allow conflicted advice (advice given by a planner who is paid by a product’s promoter) if the client consents.

There is simply no client-based reason for such an exemption. And a client who agrees to such an arrangement is likely to be doing so because they are unaware of the weight of money sloshing around, and their alternative options.

It wouldn’t be long before such an agreement became the norm in the vast majority of cases, the agreement buried inside scores of pages of boilerplate given to bewildered clients who are handed a pen by a smiling advisor and reassured that of course the advisor won’t be swayed by such commissions.

The Motley Fool doesn’t have a beef with financial planners at large – they provide a worthwhile and necessary service. Nor are we opposed to them making a living – if they provide worthwhile advice, they should be compensated appropriately, even handsomely if their advice results in great outcomes for their clients.

But such compensation should come only from the clients themselves – never from vested interests, no matter how innocent or unintended the consequences from either party.

Mr Abbott, you took a commendable step in deciding that it was inappropriate for lobbyists to hold executive positions in the Liberal Party. Conflicts – and even the appearance or possibility of same – must be avoided.

The individual investors of Australia deserve no less than transparent, conflict-free (including any appearance of and potential for same) financial advice. Please resist the temptation – and intense lobbying – of those who seek to protect themselves at the expense of their clients.

Yours sincerely,

Scott Phillips
Investment Advisor
The Motley Fool

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